Technology

Michael Dell: 'A Big Second Half'

Soaring sales overseas, a U.S. retail blitz, and product overhauls are fueling the PC maker's revival, its founder says

Dell's uneven turnaround may be smoothing out. After three up-and-down quarters of job cuts, product overhauls, and a costly retail blitz, Chief Executive Michael Dell is predicting a strong second half of 2008.

The Dell (DELL) founder told BusinessWeek in an interview that growth rates for July through December could match or exceed growth in the company's fiscal first quarter, which ended on May 2. Consumer business sales for the quarter rose 20% and unit growth hit 47%, outpacing the rest of the PC industry. "We've kind of reignited the thing," says Dell. "You'll see the growth rate be every bit of that in the second half of the year, if not more…We're going to have a big second half."

Before Dell reclaimed the reins as CEO a year and a half ago, the PC maker suffered nearly two years of declining market share, falling profits, and slower growth. Although the executive, who founded the company in 1984, has made strides toward a turnaround, results in recent quarters have been choppy. Expectations that the rough patch may be ending resurfaced in May, however, when Dell said first-quarter profit rose nearly 4%, and sales climbed 9% (BusinessWeek.com, 5/29/08), to $16.08 billion. Dell has cut jobs, redesigned products to capture share in the fast-growing consumer market, and moved computers onto the shelves of 13,000 retail stores, lessening dependence on a long-standing direct-sales approach.

Beyond Commodity PCs

Now the company is looking for new ways to expand beyond selling commodity PCs, notebooks, and servers. It's stepped up the pace of acquisitions, making eight since 2007, compared with half that in the company's first 22 years. Its founder says Dell also is gearing up to expand its services business. And PCs are selling overseas at a blistering pace: First-quarter revenue in Brazil, Russia, India, and China combined grew 58%, and sales in a basket of 14 emerging markets now account for 12% of the total.

The company also is creating a new "cloud computing" business to customize large orders of thousands of servers for customers like Facebook, Microsoft (MSFT), Amazon.com (AMZN), and Yahoo (YHOO). Now generating "hundreds of millions" of dollars in sales, cloud computing could be a $1 billion business "in a couple years," Dell says.

"All those Superpokes—that's a lot of servers," Dell says, referring to some of the more lighthearted Facebook features. "Throwing sheep—you need a lot of servers."

Thinner Laptops

In the all-important notebook market, a new line called the E-series due in mid-August will address the trend toward thinner, lighter machines. Dell has benefited as businesses have switched from buying desktops to laptops, since companies have shed off-brand PC suppliers and consolidated orders with Dell or Hewlett-Packard (HPQ), says Avi Cohen, head of research at Avian Securities. "The biggest driver for Dell, outside of macroeconomic conditions, has been the transition from desktops to notebooks," he says.

Dell's stock has been recovering, too. It's risen 23% over the past three months, compared with an 8% decline in archrival HP and a 10% drop in the Standard & Poor's 500-stock index. Dell has given up some gains in recent days amid mixed news about tech sector earnings. Apple (AAPL) shares fell after the company on July 22 forecast thinner profit margins (BusinessWeek.com, 7/22/08) in coming quarters. A few days earlier, Microsoft (MSFT) stock took a hit when its earnings for the June quarter missed Wall Street's expectations and the software giant reduced its profit forecast for the fiscal year that began on July 1.

Dell still has its share of challenges. The sluggish U.S. economy has affected its business as banks and other financial-services companies trim tech spending. The company's retail PC share is still just one-fourth that of HP. And more costs must be cut. Dell has pared 7,000 jobs in the past year—not counting new staff who joined through acquisitions—and plans to cut an additional 1,900 as part of an effort to eliminate $3 billion in annual costs by January 2011.

War Chest

The PC maker is redirecting the savings in part toward acquisitions. Dell has $9.8 billion in cash and short-term investments, and analysts say it should spend more to help itself grow. "They have to get more acquisitive," says Eric Gebaide, a managing director at investment bank Innovation Advisors, who has discussed deals with Dell in the past. Possible paths could include bulking up in IT services, à la HP and IBM (IBM), or expanding its software presence, like Sun Microsystems (JAVA). "Where does Dell get that extra juice?" Gebaide says.

One possible target could be consulting firm BearingPoint (BE), whose market value has dropped to below $170 million, Gebaide says. Adding security software could also be a natural fit. "They could make a big impact without a lot of bucks," he says.

Dell spoke with the BusinessWeek tech team in San Mateo, Calif., about the company's second-half prospects, international sales, and acquisition plans. Edited excepts follow.

Dell's consumer PC and notebook business is growing and doing well. Can you talk about how profitable that business is and anything you're doing to gain a competitive advantage against HP?

Our consumer business in the first quarter was profitable. I don't think most people were expecting it to be profitable. It's a combination of [higher] margins and [lower] costs but there's more work to be done there. A year ago we had zero retail stores selling Dell; now we have about 13,000. We fell into a bit of disrepair and now it's restoring back. If you grow units at 47%, that's way faster than the industry and suggests there was some latent opportunity for the brand. With the right products, services, distribution, and costs, we've kind of reignited the thing. You'll see the growth rate be every bit of that in the second half of the year, if not more … We're going to have a big second half.

We're also seeing an interesting phenomenon where the direct business is starting to grow again. A lot of people had written off the direct business. Now the brand is ignited again and we've got some exciting products; marketing is interesting again.

How are your business computing sales faring in this economy, and what's happening in the important financial-services sector?

When you look at the macro industry, it looks like unit growth of computers is holding up pretty well, largely due to the fact that there's an enormous amount of growth outside the U.S. Inside the U.S., growth has dropped to the mid-single digits. Interestingly, our growth has held up in the low teens. So if you take Dell out of the numbers, unit growth in the U.S. would be about zero. So we're kind of back to our old tricks again.

When a particular industry goes through a challenging time, you see a predictable pattern of behavior. It goes something like this: They don't buy anything … . These large financial institutions, generally speaking, they're not going away … . The other interesting thing is IT is a productivity-enhancing tool. So in some ways you can delay an expenditure and it just pops right back up later.

What potential do you see in cloud computing?

We're also powering some of the largest cloud computing companies and Web 2.0 companies—Facebook, Microsoft, Amazon (AMZN), and Yahoo. We created a whole new business just to build custom products for those customers. Now it's a several-hundred-million-dollar business and it will be a billion-dollar business in a couple of years. It's on a tear … All those Superpokes—that's a lot of servers. Throwing sheep—you need a lot of servers.

How are international sales going? Everyone talks about the BRIC countries, but what about the Mideast? What kind of growth are you seeing there?

We see the massive growth as outside the U.S. It's becoming more of a population-driven phenomenon like the cell phone. We're really focused on winning in the emerging countries … . In April, I was in Dubai, Saudi Arabia, Israel, and Jordan. Morocco's becoming a great market—all of Africa is growing really fast. All former Soviet republics are growing fast as well. Inside Dell we call it "BRIC plus 10." The "plus 10" includes Egypt, Indonesia, Vietnam, Ukraine, and Columbia. Follow the money—it's pretty simple.

How are you making sure the PC stays relevant in places where a lot of computing can be done on a cell phone?

If you think about these two massive spaces, you have 4 billion cell phones and 1.4 billion PCs. And in the little pond in the middle you have some amoebae popping up called smartphones, netbooks, mobile Internet devices, and ultramobile PCs, and terms that people make up in meetings that don't mean anything. From 2 inches to 12 inches, there will be all kinds of different devices that will be opportunities [for Dell]. … One of the first things we see when we see those devices is the infrastructure requirement—server farms and storage farms that we build. The line between what's a smartphone, what's a mobile Internet device, what's an ultramobile PC—it's all going to disappear.

What are some of the changes you've made in the way you're selling to the small and midsize business market?

When we would show up at a customer two or three years ago, we'd say, "Hey, we've got a new shiny box. It's got this many gigabytes, this many terabytes, and this many slots and processors." But that's not generally the way the product is sold now. It's, "OK, tell me about your problems, what are you trying to accomplish, and let's talk solutions." Customers are saying, "I don't care if it costs a little bit more or a little less than the other guy, I have to believe that you really know what the hell you're doing." So ramping up the solution quotient for us has been really key.

Along with this comes the growth of our services business. We have a fast-growing services business, roughly a $7 billion business now. We've acquired some companies to add onto that; we'll probably acquire more. We also have a lot of partners. There are a lot of companies out there that are natural partners for Dell, and probably even more after the [Electronic Data Systems (EDS)] acquisition by HP.

Obviously, you're cutting jobs. But are you hiring a lot more elsewhere?

If you're an engineer or you work directly with customers, we're hiring you. And we're hiring you all over the world. If you're not creating new products, you're not building new services, you're not innovating in the technology areas where we're growing, or you're not building customer relationships—we're figuring out how to make all those other jobs as efficient as we can.